Unlocking the Power of Startup Data Rooms for Successful Fundraising

We won’t draw dramatic pictures that startup founders don’t know what on earth is a company’s data room. However, we know how startup data rooms can be improved. Here is a list of tips on how to create and maintain an appealing early-stage data room.

The Evolution of Data Rooms

Fun fact: the origin of the term “data room” traces back to the 19th century when mergers and acquisitions were facilitated through physical rooms filled with cabinets containing sensitive company documents. These spaces were closely guarded and highly secured. However, this approach had its challenges, including cost, inconvenience, and potential risks.

Fast forward to the late 80s, and a technological revolution was underway. Virtual Data Rooms emerged as the digital successors to physical data rooms. A VDR is an online repository that offers secure storage and distribution of documents. Although the security principles remain, modern VDRs leverage advanced authentication and encryption technologies, replacing padlocks with multi-factor authentication and digital watermarks.

Unveiling the Role of Data Rooms in Venture Deals

In the realm of early-stage venture deals, data rooms play a pivotal role in two stages of the investment process. During the initial stage, investors may request access to your data room even before presenting a term sheet. At this point, they’re likely relying on your pitch deck, website, and publicly available information. The short version of the data room acts as a spot check, aiding internal discussions among the investor team.

The extended data rooms come into play after you’ve received a term sheet. These rooms provide investors with detailed and granular information to facilitate due diligence. By structuring your data room effectively, you streamline the due diligence process, making it easier for investors to dig deeper into your business.

Crafting a Winning Data Room

Creating an effective data room requires careful structuring, catering to the needs of both early-stage investors and founders. When, to whom, and how to share this data room? First, avoid sharing prematurely; only share with trusted, vetted venture investors. Remember to maintain read-only permissions for security reasons.

Short data room for an investor’s introduction should include:

1. Pitch deck

Provide a concise overview of your problem-solving approach, product, competitors, and fundraising details.

Tip: use simple Power Point — it will make your life much easier to make amendments in the future, especially if you need some swift adjustments to be made in times of your startup’s growth.

5 Things Your Pitch Deck Needs to Include for VCs to Consider Investing in Your Company

2. Product Demo

Showcase how it works no matter the hardware or software, but you should be able to prepare a visual explainer so the VCs can discuss the product internally with those colleagues who didn’t attend a call for example.

Tip: here are some product demo video maker software tools you may find helpful: Wondershare DemoCreator, Demo Builder, Adobe Captivate (easier than Premiere Pro, they say), Vyond, Articulate Storyline 360, Powtoon, Snagit, Corpteaser, Headliner.

3. Financials

Offer a financial overview: P&L / Income Statement, Balance Sheet, Cashflow Statement, Financial Projections 1–3 years in the future.

Tip: check our SourceForge to choose the financial modelling software (or save your time and use Excel. Anyway, LETA’s position here is that the startup should actually use that data and not only craft XLS for VCs).

4. Team & Roles

Highlight your team’s experience and roles within the company. You can attach CVs or patents of the founders (something that validates your expertise).

Tip: you can use LinkedIn Resume Builder to save time.

5. The most recent Cap Table

Provide an overview of equity ownership among stakeholders.

Tip: download Carta’s free Cap Table Template.

Extended Data Room: Streamlining Due Diligence

Share the full version upon receiving a term sheet during a due diligence process (and don’t forget about a reverse DD, this should be a trusted investor, meaning that they should have a reputation or you should have several recommendations and not question the investor’s integrity). Allow investors to make copies for internal records. Here is what we expect to see at this stage:

1. Corporate records

Certify your company’s good standing with legal documents: Certificate of incorporation, Articles of Association (by-laws); Shareholder Agreement; any agreements granting rights to acquire securities of the Company, etc.

2. Customer & Partner Contracts

Include agreements that significantly impact your business.

3. Usage data

This data will vary based on the type of company.

• Marketplaces: Metrics like transactions, GMV, acquisition channels, and retention.
• Social Apps: Metrics encompass DAU, retention cohorts, acquisition channels, engagement, and more.
• Subscriptions: Key metrics include MRR, conversion rates, retention cohorts, and LTV/CAC analysis.
• E-commerce: Focus on web traffic, transactions, return rates, gross margin, and acquisition costs.
  etc.

4. Full Cap Table Documents

Details of previous fundraising rounds or liquidity events, shareholder certificates, vesting schedules, ESOP details.

5. Intellectual Property documents

List of all trademarks, trade names or service marks held by the Company (including registration number, date, registrant, country and first use dates); list and copies of all patents and patents applications held by the Company (including patent numbers, date of issue, date of acquisition, cost, reserve for amortization, present book value and nature of patent), etc.

6. Disputes and litigation

Any past, current, pending or threatened dispute or investigation related to labor agreements or unions, trademarks, etc.

7. Employees and benefits

List of employees with salary, contract type, commission structure, country of residence, etc.

8. Tax Filings

Data Room Challenges and Red Flags

We at LETA Capital advise you to check the following criteria before sending the documents for due diligence:

• Ensure consistency between numbers in the deck and the data room.
• Avoid selective presentation of metrics, this will cause more harm than good. It’s better to show downturns alongside the growing metrics. The investor may think that you trying to hide stagnation or negative tendencies may be a red flag: what could be waiting for them next?
• Maintain transparency and honesty to build trust with investors. Are there any litigations your company is involved in? Better tell at this stage. Otherwise, you can be trapped in a situation where not your litigations, but your dishonesty can become a dealbreaker.

Where to Store the Data Room?

OK, so we came to an end and now need to choose the tool for managing your startup’s data room. DealRoom has prepared a comparative analysis of various tools that could be used to keep and maintain your data. However, we would recommend that early-stage startups use Google Drive/Dropbox/Notion as there is no need to use the whole functionality of specific platforms.

In the world of startups and venture capital, a well-structured data room can make all the difference in securing funding and building investor confidence. By understanding the nuances of data rooms, tailoring their content to your startup’s needs, and leveraging technology for secure information sharing, you set yourself up for success in the competitive landscape of early-stage investing.

Do you run an innovative tech startup? We are investing in early-stage revenue-generating software startups and would love to hear from you! You can reach us at info@leta.vc or fill in the form here.

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